Public Information Notice No. 11/138

Public Information Notice: IMF Executive Board Concludes 2011 Discussion on Common Policies of Member Countries of the Central African Economic and Monetary Community

November 11, 2011

On July 20, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the annual discussions on Common Policies of Member Countries with the Central African Economic and Monetary Community (CEMAC).¹

Background

The CEMAC has earned significant revenues from oil production in past decades, but faces substantial growth and development challenges. Five of the six CEMAC countries are oil producers; oil accounts for about 45 percent of regional gross domestic product (GDP) and 90 percent of total exports. Oil revenue, channeled through government spending, is the main driver of economic activity, but volatile oil prices and procyclical fiscal policy have caused boom and bust cycles. Spending out of oil wealth has not led to more inclusive growth. Against the backdrop of high inequality, poverty and unemployment remain widespread, and it is unlikely the region will meet the Millennium Development Goals by 2015.

The CEMAC is recovering from the global financial crisis, although growth has not returned to pre-crisis levels and continues to lag the average in Sub-saharan Africa. Although higher than the West African Economic and Monetary Union average, the region’s inflation has been contained largely because higher international oil prices have not been passed through to domestic prices. Good harvests in some CEMAC countries have also helped contain inflation. High commodity prices and healthy export demand have improved the current account and fiscal balances, but the non-oil primary fiscal deficit has widened, reflecting a scaling up of public investment. The outlook is generally positive with activity expected to remain robust, supported by public investment and commodity exports. The foremost downside risk is a decline in commodity prices, especially oil, given a heavy dependence on commodity exports.

Compliance with regional convergence criteria improved in 2010 with 6 violations in 2010, down from 9 in 2009. All the CEMAC countries satisfied the criteria on public debt and the non-accumulation of arrears, while four missed the requirement of a non-negative basic fiscal balance and two missed the inflation threshold.

The fixed exchange rate system is backed by gross international reserves which currently stand at about 4.5 months of total imports (100 percent of broad money) and are projected to stabilize at about 4 months of total imports by 2015. The union’s reserves position could strengthen further if oil prices are higher than projected in the medium term.

Executive Board Assessment

Executive Directors welcomed the region’s economic recovery from the global financial crisis and its overall positive outlook. Directors noted, however, that the recovery has been uneven across member countries and that inflation is on the rise due to high international food and fuel prices. They were also concerned with the continued high levels of unemployment and poverty, and the remaining impediments to stronger and sustained growth. In this context, Directors emphasized the need for stepped-up efforts on structural reforms and infrastructure investment to foster broad-based long-term growth and poverty reduction.

Directors encouraged the authorities to adopt an appropriate policy mix to contain inflationary pressures in the short term. They called for vigilance to the possible second-round effects of the food and fuel price shock. At the same time, they supported reallocating spending toward measures aimed at mitigating the adverse impact of the shock on the most vulnerable segments of the population.

To help ensure that the region’s oil wealth is fully translated to improved economic growth and social outcomes, Directors encouraged the authorities to improve the quality of social and infrastructure spending through proper selection and implementation of investment projects. They recommended anchoring capital budgets in realistic multi-year investment plans and formulating annual budgets in the context of medium-term fiscal strategies. They also stressed the importance of giving priority to investments in infrastructure and the health and education sectors, and to further strengthening transparency and accountability in the use of oil and other public resources.

Directors underscored the need to promote broad-based, stronger growth over the medium term. They noted that strengthening institutions and streamlining administrative procedures will be critical to improve the business environment. Equally important are efforts to broaden access to credit and remove barriers to regional trade. In this regard, Directors encouraged the authorities to accelerate financial sector reform to address weak banks, strengthen the regulatory framework, increase the capacity of the regional banking supervisor (Central African Banking Commission), and further develop the sector.

Directors noted the staff’s assessment that the union’s real effective exchange rate, current account positions, and reserves are broadly consistent with external stability. They stressed, however, that compliance with the rule for repatriating export receipts to the Bank of Central African States would be important, and therefore encouraged further strengthening of compliance with union rules.